Weekend Economists: WEE Can Fly! May 25-28, 2012

[Demeter]

98. JPMorgan’s Deficient Disclosures By PETER EAVIS

http://dealbook.nytimes.com/2012/05/24/jpmorgans-deficient-disclosures/


So many questions still dangle over JPMorgan Chase’s disastrous credit bet. Here is one more: Why is it so hard to find answers in the bank’s public financial filings? Since JPMorgan announced more than $2 billion of losses on the trade earlier this month, the bank has largely relied on its chief executive, Jamie Dimon, to talk about the bet. He has not provided meaningful specifics when analysts have asked for them. And JPMorgan has neither released new filings with details about the mechanics of the trade nor used existing disclosures to help outsiders get to the bottom of what is going on. This is par for the course on Wall Street. Bank filings rarely contain data that could give warning of a trading blowup. And when a big bet does go bad, banks usually stay tight-lipped about it. But JPMorgan’s problems may show the need for better disclosure about trading positions.

First, regulators investigating the bank appear to believe there is a disclosure issue with the trade, which was made in JPMorgan’s chief investment office, a unit of the bank that invests excess money.

“Our focus is on the quality of their risk disclosure,” Mary L. Schapiro, chairwoman of the Securities and Exchange Commission, said at a hearing of the Senate Banking Committee on Tuesday. “We’re very focused on the accuracy and timeliness of that disclosure.”

One of the risk disclosures regulators may focus on is a metric called value at risk, a tool banks use to estimate potential trading losses under stressed conditions. In its first-quarter earnings release on April 13, JPMorgan provided a value-at-risk reading for the chief investment office. On May 10, the bank substantially increased the potential loss estimate, saying the prior figure was inaccurate. In theory, if investors had gotten the accurate value-at-risk figure on April 13, they may have had at least a vague warning that the chief investment office was involved in volatile trading. The unit’s losses ballooned after the end of the first quarter.

But beyond inadequate value-at-risk information, a lot seems missing from JPMorgan’s disclosures about its hedges — the trades the bank makes to offset risks elsewhere. JPMorgan said its $2 billion-plus losses stemmed from a hedge that somehow went awry. Like other banks, JPMorgan makes specific hedge disclosures in filings with the S.E.C., but none appear to include the big moves that led to the hedging losses. That probably means it is buried in aggregated disclosures — and could even be part of numbers identified as client-related activity...

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